Will Investors Ever Commit to the Russian Ruble?

By Ira Iosebashvili

When it comes to the ruble, investors have always been disinclined to display a loving, lifelong commitment.

Last year’s initial passionate embrace grew cold by the end of summer, when the ruble was brought low by a crippling drought, shifting political sands resulting from the ousting of Moscow’s powerful mayor and a spate of year-end corporate debt repayments. While other emerging markets were at their wits’ end in the quest to avoid speculative capital, Russia saw capital outflows, and the ruble was the autumn’s worst performing currency versus the dollar.

Now the ruble is once gain melting investor’s hearts, having risen some 9% since the start of the year. In part, the market can thank the central bank, Spurred by surging inflation, the regulator last month unexpectedly raised rates across the board in its most aggressive monetary policy tightening since the economic crisis.

A few days later, the Bank of Russia widened the ruble’s trading band against a basket of dollars and euros, a move that allows the currency to appreciate and battle the rising prices that are frustrating the population and making the government nervous, especially with presidential elections around the corner in 2012.

International events have played their part as well. With crude hovering near two and a half year highs on political turmoil in the strife-torn Middle East, Russia—the world’s largest energy producer—is seen as a perfect way to play oil with minimal exposure to political risk. Fund flow data for the last several months has shown investors piling into Russia, even as they dump other emerging markets amid a flight to quality.

It’s almost enough to make you hear wedding bells, but alas, with this couple, thunderclouds are always on the horizon. On Friday, a top central bank official said that despite high oil prices and a surging currency, Russia saw $13 billion of capital outflows in January alone—almost a quarter of the whopping $38 billion in capital flight it recorded last year. The culprit, according to Finance Minister Alexei Kudrin, is the upcoming presidential election, which he says will always lead investors to hedge their risks, especially “in a country like ours.”

It is widely assumed Mr. Kudrin’s “investors” are Russian bureaucrats and businessmen taking money out of the country in case they get left out in the cold amid political reshuffling. This outflow, it seems, is so large that it cannot be hidden, not by high oil prices, nor by whatever capital is attracted by higher interest rates.

So can anyone be faulted for thinking that sooner or later, the ruble will get jilted once again?

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